Vigilance Is Watchword on Taxation

According to industry veteran John McKechnie, who was working on Capitol Hill back in 1986, the last time credit union tax exemption was on the Congressional chopping block, a “volatile” environment on Capitol Hill means credit unions should be vigilant when it comes to protecting their tax-exempt status in 2013.

Tax expenditures are receiving a lot of scrutiny as Congress looks for ways to increase revenues and cut the deficit, he said.

Credit unions were shocked Nov. 14 when it was revealed that H.R. 6474 included the elimination of the credit union tax exemption among seven immediate tax reforms recommended by the National Commission on Fiscal Responsibility and Reform. However, the author of the bill, U.S. Rep. Dennis Ross (R-Fla.), quickly removed the provision, saying it was a mistake.

“We regret that the credit union exemption was unintentionally included in the ‘phase-out’ section of H.R. 6474. It was intended it to be included in the ‘maintained’ section of the bill,” said Ross spokesman Anthony Foti.

The Simpson-Bowles commission was a bi-partisan panel created by President Obama in 2010 to study and propose ways to improve the nation’s fiscal health. Although it didn’t name credit unions specifically, the commission did recommend eliminating all $1.1 trillion in tax expenditures. Simpson-Bowles will serve as a starting point on Capitol Hill, McKechnie said, because it has credibility. But, because it lacks details, Congress will fill in the blanks with expenditures that could include credit unions.

The banking lobby has been pushing for credit union taxation for years and is expected to jump on the opportunity to include credit unions in tax reforms.

Although credit unions are not-for-profit cooperatives, other countries have taxed credit union profits, some for years. Canadian credit unions have been taxed since the 1970s; Australian credit unions also pay taxes. Costa Rica’s credit unions fought an unsuccessful battle over taxation in 2008, and now pay taxes on interest income.

Although the tax expense would be tough for credit unions to absorb, particularly small credit unions that haul in profits smaller than likely tax rates, it wouldn’t come without some benefits. If credit unions were taxed, they would likely lose restrictions to member business lending and be permitted to put supplemental capital on their books.

Congress may also consider taxing only large credit unions that compete with banks, leaving small credit unions tax-exempt.